TCS Daily

The Origins of Ill Will

During the World Summit on Sustainable Development in September, many
Americans expressed their surprise at the level of anti-American
feelings among the delegates from foreign countries and from some
people living in Johannesburg. Of course, anti-Americanism is not a new
phenomenon. Only a year ago, hatred of the United States culminated in
the tragedy of Sept. 11. As the terrorist threats against the United
States continue, it is of great importance to understand the roots of
this hatred. One probable reason for that hatred is economic inequality
and the (mis)understanding of distribution of economic resources.

We
live in a world of rights and entitlements. According to the commonly
held view, life in the West "entitles us" to freedom from hunger,
decent housing and healthcare. All of these entitlements come at a
price. They cost money that someone somewhere had to earn. It is,
therefore, incorrect to talk about "free" provision of healthcare and
welfare. Instead, it is more appropriate to talk about a "wealth
transfer" between different groups of people. On the one hand are the
taxpayers and on the other hand are the welfare recipients.

Before
the era of the welfare state, such transfers of wealth also existed.
But they were voluntary. They were based on a feeling of empathy for
those in need. In those days, however, there was a clear understanding
concerning the nature of this transfer. The giver was seen as a
benefactor, while the taker was seen as a lucky recipient. The rich
were expected to be generous, whilst the poor were expected to be
grateful. Under the welfare state, however, the coercive power of the
government compelled those with higher income to share their wealth
with those with lower income. The more a person earned, the more he or
she had to pay in taxes.

That progressive taxation was
sometimes explained and defended in terms of solidarity, equality and
marginal utility. However, by far the most popular explanation was that
of "exploitation". The basis of this explanation rested in a zero-sum
understanding of economics, which assumed that the prosperity of one
person [a businessman, say] was directly dependent on poverty of
another [a worker, say]. According to that premise, wealth is never
produced or increased. Instead, it is only transferred from the
powerless to the powerful. But if this is true, humanity should have
remained in caves forever. Instead, the world has grown ever richer. In
fact, the workers in capitalist countries - whom Marx and Lenin claimed
to be "exploited" - are today much richer than their counterparts in
former socialist countries. Ironically, it was these socialist
countries, which claimed to have gotten rid of "exploitation".

In
practice, all of the above assumptions contributed to the growing
separation between creation of economic value and remuneration. The
amount of money that both businessman and worker were left with at the
end of the day, in other words, became disconnected from the economic
value that either of them had created. As with most governmental
actions, the introduction of the welfare state also had unintended
consequences. One of these was the recognition by all members of
society that their well-being was less dependent on their performance
in the marketplace and more dependent on the goodwill of the
government. As a result, different special interest groups started to
lobby the government in order to receive better treatment. The other
side of the coin was that elections became the time for politicians to
bribe the electorate by promises of further entitlements.

Over
time, each of these wealth transfers or "entitlements" became less of a
gift from a particular government and more of an expectation to be
honored and even improved upon by any future government. This structure
of entitlements is now so deeply engrained that any potential cutbacks
are seen as illegitimate transgressions on legitimate rights of the
welfare recipients. Interestingly, giving and receiving of foreign aid
- be it in the form of outright financial grants, lending at discounted
rates or transfer of technology, machinery and other goods is
increasingly controlled by the same assumptions.

At its birth,
foreign aid was seen as a large-scale charity. The Marshall Plan was
thus understood as an American gift to the war-ravaged continent of
Europe. No European felt "entitled" to it or implied that the creation
of the Marshall Plan was an American "duty" or "responsibility".
Moreover, the plan was always meant to be a short-term relief with a
maximum duration of four years. As such, the plan stands in stark
contrast with the open-ended foreign aid programs in the underdeveloped
world today. Though the benefits of the Marshall Plan are still
debated, the ineffectiveness of the subsequent foreign aid programs is
unambiguous. In Africa, for example, there has actually emerged an
inverse relationship between foreign aid and development. For decades
aid has served to postpone necessary economic reform and to preserve
the hold on power of some of Africa's most unsavory dictators.

Part
of this transition from short-term relief of disasters to long-term
subsidies of failed states rests in a plethora of theories purporting
to explain why developed countries should transfer their wealth to the
underdeveloped ones. Past "exploitation" of the colonies is often
credited with making the developed world rich. That is plainly not
true. Britain, for example, had become the richest country in the world
long before she acquired any significant colonial possessions. Other
rich countries, Switzerland, Norway and Finland among them, never had
any colonies. Similarly, former colonial status is often associated
with poverty. But both Canada and Australia used to be colonies. Today,
these two countries are very prosperous. Then there was the "periphery
theory". This theory maintained that the world was permanently divided
into the rich core and poor periphery, where the former exploited and
impoverished the latter. The spectacular success of previously poor
countries, such as Taiwan, South Korea, Singapore, Hong Kong and Chile
showed this view to be mistaken.

Despite irrefutable empirical
evidence to the contrary, the above theories possess remarkable staying
power. Implicit in all these theories together is, as with domestic
economic arrangements in welfare states, the separation between
economically valuable activities and reward. In a nutshell, many people
do not see the wealth of the United States as a result of domestic
policies conducive to economic growth - the most important of which are
a free economy and the rule of law. Instead, they see it resulting from
a variety of international financial conspiracies. The most popular
among these conspiracy theories is price fixing. Accordingly, it is
argued that companies in rich countries keep the poor countries from
receiving a "fair" price for their produce. Coffee is often given as an
example. But that is untrue. The daily price of coffee is determined by
decisions made by millions of coffee-drinkers and producers of coffee
across the globe. The more coffee is consumed, the more expensive it
becomes. The less coffee is consumed, the less expensive it becomes.
Thus, if everyone suddenly decided to drink coffee, demand for coffee
would outstrip supply and the price of coffee would skyrocket.
Conversely, if everyone stopped drinking coffee, supply of coffee would
outstrip demand and the price of coffee would plummet.

However,
pronouncements of many ill-informed activists and leaders in the
under-developed world seem to suggest that economic inequality in the
world is one of the central reasons why it is acceptable to hate the
West in general and the USA in particular. As with domestic economics,
in international economics it is often wrongly assumed that the
prosperity of the developed world is directly dependent on the poverty
of the under-developed world. Thus, it is not unusual to hear some
activists claim that "excessive" consumption in the developed world
makes the under-developed world starve. But these two are totally
unconnected. In the developed world, the level of consumption, for
example, of foodstuffs and electricity, is proportionate to the level
of its production of these items. On the other hand, the level of
starvation in the underdeveloped world is proportionate to the level of
its inability - mainly due to mismanagement - to produce much.

In
a recent BBC documentary, children at school in Cambridgeshire,
England, were shown a report concerning starving children in Africa.
After watching the report, a number of pupils promised to stop
"wasting" their food as though their "waste" had anything to do with
poverty in Africa. In reality, African children starve because their
countries either do not produce food, or cannot purchase it in the
international markets because of lack of revenue - which, after all,
also needs to be earned through production. If anything, the
pro-foreign aid activists should encourage children in Britain to
consume more not less, for the Value Added Tax (VAT) which the UK
government imposes on food sales would increase the government's
tax-revenue, which in turn could be used to lavish more aid on the
underdeveloped world. More aid is, of course, what the activists are
demanding. But how is it to be facilitated?

Unlike in the
domestic arena, there is no world government to take from some and give
to others. It is for this reason that many wish to embolden the UN to
spread its activities into the economic area. The proposal for an
Economic Security Council voiced in Johannesburg, for example, is an
ingenious way in which wealth could be transferred from the prosperous
nations to those the UN will define as "needy". Keeping with the
egalitarian logic of recent decades, there would undoubtedly be
pressure for the Economic Security Council to conduct its affairs
according to a majority vote. It does not take a rocket scientist to
figure out who would constitute the majority and who would have to pay
up.

Thus, foreign aid is no longer what it briefly was -
charity. It too has become a form of entitlement. It is spoken of in
terms of "wealth sharing" or "expertise sharing". Thus, when a new
foreign aid package is announced, one never hears a word of gratitude
from its intended recipients. In fact, every new donation is met with
disapproving comments about the level of that aid. The commitments to
"wealth sharing" that the developed world made in Johannesburg, for
example, were universally derided as unsatisfactory. One South African
commentator observed that "The developed nations have once again failed
to meet foreign aid targets". But who sets these targets? Clearly, it
is not the taxpayers in the developed world, who will have to pay for
this foreign aid.

As with domestic economic arrangements, the
reason for the failure to take the views of the taxpayers in the
developed world into account rests in the separation between creation
of economic value and remuneration. One example shows this clearly. As
South Africa's President Thabo Mbeki recently stated, for the first
time the world has enough resources and expertise to eradicate poverty.
Predictably, Mr. Mbeki emphasized that the only thing needed is the
will to do so. Actually, "the world" has nothing. All the wealth and
expertise belongs to specific individuals residing in specific
countries. The proverbial pot into which all good things flow only to
be divided up among those in need does not exist. As Robert Nozick
pointed out, every dollar comes with rights attached. These rights,
however, are not those of welfare recipients - be they domestic or
international - but those of producers of economic value.

If I
am correct, then at least some of the roots of contemporary
anti-Americanism rest on a deep misunderstanding concerning the
functioning of international economics. Contrary to common
misconception, the reasons for global economic inequality rest on a
local level. They include the lack of rule of law, lack of respect for
private property, economic collectivism, corruption and war. That said,
the above analysis of the nature of the problem is the easy part. The
difficulty rests in ascertaining how to address decades of
misinformation regarding international economics. Perhaps the most
obvious first step is for the US to stop subsidizing regimes which
treat foreign aid as an entitlement and a matter of justice. The
governing elites in the underdeveloped world must assume responsibility
for decades of misgovernance. They must not be encouraged to enhance
their power - especially if they do so by using American money to fund
anti-American propaganda.